Overview

Post-Soviet Ukraine was a completely new entity, both as a state and as a nation. Since independence in 1991, it has struggled to overcome internal divisions, create representative political institutions, and build a market economy with opportunity for all. Although it appeared poised for progress after the Orange Revolution in 2004, Ukraine today remains gripped by corruption, repression, and oligarchy.

Ukraine's old Communist elite remained in charge following independence. The first president, Leonid Kravchuk, centralized power rather than building real democracy. Little civil society existed to check his autocratic tendencies and inflation had decimated the middle class in the early 1990s. Kravchuk also aimed to recreate a smaller version of the Soviet economy instead of a true market economy. Gross domestic product (GDP) fell by almost 50 percent and Kravchuk was swept aside in the 1994 elections.

His successor, Leonid Kuchma, forced through a new constitution in 1996, exploiting both nationalists who favored state-building and liberals who favored market reforms. Once Kuchma had the powers granted by the new charter, however, he advanced neither.

As reform faltered, oligarchs took over the economy in the late 1990s and early 2000s. The opaque privatization process was rigged to their benefit and Kuchma parceled control of heavy industry to rival regional clans in insider deals. Substantive economic reform was delayed. Real GDP per capita dropped below $650 between 1997 and 1999.

In December 1999, an impending balance of payments crisis forced Kuchma to appoint a reformist prime minister, Viktor Yushchenko. Yushchenko's reforms boosted growth, but this enriched the oligarchs and made them harder to dislodge. Added to this combustible mix was the Gongadze scandal, named for a pioneering online journalist found beheaded in 2000. Secret tapes emerged in which President Kuchma was heard demanding that his subordinates deal with Gongadze in colorful ways.

In 2004, the Orange Revolution, triggered by an attempt to rig a presidential election, captured global attention. Hundreds of thousands mounted demonstrations in Kiev for two months. The opposition candidate, former prime minister Yushchenko, won a revote, which appeared to lay the groundwork for real democracy. But the so-called revolution produced only a change in elites, and those elites were captured by the system rather than vice versa. The nascent middle class and small- and medium-enterprise sector were too small to sustain robust pressure for democracy.

Moreover, pro-Orange voters were nearly all in western and central Ukraine, allowing defeated candidate Viktor Yanukovych, backed by Russia, to question the revolution's legitimacy in the east and south. Indeed, since independence, Ukraine has faced questions of national identity. Although decades of Soviet rule blurred many cultural differences, issues of ethnicity, language, and religion remain divisive.

As president, Yushchenko presided over political crises and elite infighting. The global downturn then sent Ukraine's already weak economy into free fall in 2009. GDP fell by 15 percent. Exports fell by 49 percent in the first three quarters, with steel especially hard hit.

A lack of international support also hindered Ukraine's post-2004 reformers. The European Union (EU) was overextended with new members and Ukraine's prospects for membership in the North Atlantic Treaty Organization were always remote and receded rapidly after the war between Russia and Georgia in 2008. As Western support dissipated, Russia sought to impede reform and democratization.

With Orange supporters disillusioned and many Ukrainians viewing Russia as the only source of significant funds, Yanukovych won the 2010 presidential election. Orange-era infighting had weakened political institutions and fatigued voters, allowing Yanukovych to centralize power with little resistance. He prosecuted his political opponents, notably former prime minister Yulia Tymoshenko, who was sentenced to seven years in prison on trumped-up charges. Though he raised the gas price and pension age, Yanukovych also failed to enact thorough economic reforms.

Pathways to Freedom: Political and Economic Lessons From Democratic Transitions, a new book from the Council on Foreign Relations, explores Ukraine's progress and challenges in six areas of economic, political, and social development.

Socioeconomic Exclusion and Inclusion

Ukraine's economy has enough money to make the oligarchs rich, but not the people. World Bank figures show that GDP per capita fell by more than half during the 1990s, from $1,490 in 1991, before recovering to $3,615 in 2011. Inequality and poverty have also dropped since the 1990s. Official figures do not really account for the super-rich, however. Ukraine's fifty richest citizens control almost half of GDP.

The country's cleavages make it hard to challenge oligarchic power. Though ethnic Ukrainians are the vast majority, Ukraine is evenly split linguistically; Ukrainophones are largely rural and Russophones typically work at factories in the more-developed east. Many continue to associate Russian language and culture with urbanity and opportunity. Politicians play off the resentments of the Russian- and Ukrainian-speaking camps, hindering the formation of cohesive governments with coherent reform programs.

Economic Structure and Policies

Ukraine has a classic rentier curse. Oligarchs and politicians, often one and the same, extract rents from the transit of energy and other scams. Some prices are market based and others controlled, creating huge opportunities for arbitrage. Various licenses and concessions depend on political favor, facilitating corrupt lobbying, and oligarchs have manipulated the political process to ensure a supply of subsidized gas, coal, and electricity. Bursts of market reform in 1994–95 and 2000–2001 were only the minimum necessary to prevent international lenders from withdrawing completely. After 2004, the Orange Revolution's leaders enacted populist measures rather than tackling systemic problems.

Notwithstanding relatively liberal privatization laws, the process came to benefit oligarchs. Most big enterprises were sold by closed discount cash sales. Today, without an effective legal system, all property remains insecure. Violent corporate raiding is widespread; oligarchs use mafia muscle to take over each other's firms and scare away most foreign investors. The black economy accounts for 40 to 50 percent of official GDP. Ukraine has received support from international financial institutions, but these funds have been small relative to Ukraine's GDP. The country's failure to enact reforms has repeatedly marred its relationship with the International Monetary Fund.

Civil Society and Media

Ukraine's civil society, though stronger than other aspects of democratic governance, remains weak. After the Orange Revolution, cohesion and engagement quickly disintegrated as people grew disillusioned by elites' broken promises. Today, only 5 percent of Ukrainians belong to nongovernmental organizations (NGOs). The current Yanukovych government has curtailed freedom of assembly and used the security and tax services to harass activists. Despite this (or perhaps because of it), however, NGO activities are rising. Some elites, exasperated by the divided political opposition, are organizing civil society groups instead of pursuing political power.

Ukraine's media have generally functioned as an instrument of power rather than an independent force. Many media companies have long been left in private hands under "reliable" oligarchic control, fostering self-censorship. The Orange Revolution allowed a window of media freedom, but today many journalists face bullying and bribery. By contrast, the internet remains lively and free, with growing social media and anticorruption sites.

Legal System and Rule of Law

The law in Ukraine is deliberately capricious and its application arbitrary. Because the population must constantly break the law, authorities can decide whom to prosecute, and they wield this authority to consolidate power. Punishment is used to disable anyone who challenges the system; forgiveness is used as patronage. Most judges are holdovers from the Communist era and continue to respond to instructions from officials. Conviction rates top 99 percent.

Reforms passed in 2010 have increased executive control over the judiciary. Yanukovych created two new courts to bypass relatively independent ones and he purged the Supreme Court and Constitutional Court. Other executive bodies gained control over judicial appointments. The ease with which authorities launched political prosecutions in 2011 and 2012—most prominently against Tymoshenko—showed the new system's weakness. Today, politicians routinely take bribes from oligarchs or are oligarchs themselves. Members of parliament are immune from prosecution, making public office a gravy train. A place on an electoral list is estimated to cost $5 million in bribes to party leaders.

Government Structure and Division of Power

Ukraine has made almost every mistake imaginable in its institutional design. In the 1990s, it built ministries that recreated bad habits of the Soviet command economy. Prosecutors, tax police, and the former KGB were given too much power. Kuchma also expanded presidential authority but used it to act as the oligarchs' patron. The constitutional changes to weaken the presidency agreed to during the Orange Revolution were therefore not necessarily bad ideas. However, they were hastily drafted and poorly implemented, allowing oligarchs to build an alternative power center in parliament. Nonetheless, the reversal of these changes in 2010 was unwise. It restored the status quo ante, rather than keeping the best of the reforms, and its aim was not rebalancing the system but entrenching Yanukovych's administration.

Education and Demography

Ukraine's population is declining and aging. The country has one of the highest pensioner populations and dependency ratios in Europe, with fourteen million retirees in a population of forty-six million. Pensions absorbed 18 percent of GDP in 2009. Most pensioners live in Russian-speaking cities of southeast Ukraine. But dependency on welfare, state wages, and pensions is also high in the Ukrainian-speaking western and central regions, blunting the potential for a reformist party on the Orange side.

One positive Soviet legacy is mass education: almost 30 percent of Ukrainians have completed higher education, which could help build a middle class over time. Today's economy is growing just enough to absorb graduates, but a lack of opportunities will breed tension later if the economy deteriorates.

Conclusion

Ukraine missed its transition moment in 2004 as Orange politicians failed to tackle the rentier curse and supporting forces lacked the strength to help. More recently, Yanukovych has been able to swiftly disable the opposition, though civil society has proved surprisingly resilient. The optimistic scenario is that Yanukovych's project will implode or provoke protests if greedy elites overreach. The realistic scenario is that Ukraine will remain difficult to change.

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